Part 1 – The Legacy of the Family Farm – Constructive Forces of Succession and Transition

Most family farms are not in a position where succession and transition are possible. The truth of the matter is that I turn down almost all the requests we get for this type of work. It is a major issue in agriculture because when it comes down to the nuts and bolts, the word family gets in the way of the goal of a transition. How would you do it if you weren’t a farm? This is a pivotal question and step one of a strategy.

 

In agriculture we romanticize the family farm. We make it something greater than every other industry, and we identify it as different or not the same. This makes the goals around passing the operation to the next level almost impossible to accomplish. How do you transfer a feeling or an emotion without things going wrong? The answer is you don’t.

 

A multi-million-dollar farm is no different than any other business. Many will say that due to the tax treatment of agriculture it changes the game, but in my experience all it does is muddy the waters. 

 

Yes, we don’t have to buy and sell the entire operation, but this does not mean we don’t value it and do the transaction using the same methods. Family going out, what is it worth, family coming in, how are you going to pay them for it. Simple math, simple strategy.

 

I believe there are three constructive forces and three destructive forces when it comes to succession and transition. In part one I am going to focus on those three areas that need to be properly addressed to fully have a strategy that works today and into the future.

 

Compensation

 

Succession plans will not work if the farm itself cannot support the owners. In my experience, most farms cannot identify how many acres are required per family based on their own operations. At TEPAP they called it GFR (gross farm revenue) to OPM (operating profit margin). 

 

In a quick example, if you have a 12% profit margin and living costs of an additional family unit are $60K, then the farm would need to increase gross farm revenue by $500K to cover the ownership compensation. If you are budgeting for $500 per acre gross revenue then this would be an increase of 1,000 acres. At $150K of ownership draws that would be closer to 2,500 acres. 

 

As I mentioned before, simple math. 

 

So, a 3,000-acre farm looking to do a transition plan is not even a conversation without off-farm income.

 

Now, after you identify whether the farm can sustain this transition, how do you compensate each party? Just because a son or daughter wants to make $150K does not mean that they have earned it. 

 

As I have mentioned in other blogs, you need to identify the land returns, the equity returns, and then the compensation for labour and management. This way the exiting family is paid for leaving their land and equity in the business, and the entering family is paid for taking on the tasks and day to day operations. What all this is worth is a whole other conversation.

 

Many used to say that “having Christmas together” was the goal of a good succession plan. My line is closer to “Christmas still sucks if you’re bankrupt”. Compensation is always the first pillar.

 

Roles and Accountability

 

Farming may be the only business where you have two individuals with the same skill set fighting over the same jobs. If done correctly, the next generation specializes in an ability totally separate from the older generation. But sadly, most farms in Canada tend to sway towards the same specialities. 

 

And we wonder why family dynamics get in the way – you both are fighting over the same job.

 

Everyone on a farm will have a unique ability. This is not the ability to drive a tractor well, that is not a unique ability, that is just labour and hours. 

 

When we talk about skill sets, we are talking in terms of agronomy, finance, marketing, or other professional specialties outside of the operational floor. The truth is that most farms should have outside labour in operations so that the ownership can concentrate on the actual money-making ventures within the entity – management and leadership.

 

Prior to starting down the road to succession, you need to identify all the roles on the farm and whose they are. We call it a RACI chart (responsible, accountable, consulted, and informed), as it lists out all the tasks on the family farm and what people are involved. Who is:

 

  • Responsible to perform the task (may be several individuals)
  • Accountable for the completion of the task (can only be one and may also be the person responsible)
  • Consulted before the task is completed.
  • Informed when the task is done and the outcome.

 

If you can nail down this chart and everybody follows their positions, it eliminates a significant number of future issues that come up when everybody tries to do the same job.

 

Communication

 

Most of the succession issues that are created on family farms can be drilled down to communication. Somebody did not follow the consulted or informed positions on the RACI chart and therefore this leads to hurt feelings or irritation. 

 

Communication is a “process” issue much more than an emotional issue. The solution is often putting in procedures and processes to ensure proper communication between owners, managers, and any other employees.

 

The easiest way to fix communication is schedule meetings with strict agendas. This is not a coffee in the lunchroom and talk about the weather meeting, this is a sit-down meeting that involves covering the main aspects of the business. Financial metrics, human resources, current issues that need to be solved, and get back to your day. Too often businesses let these go down tangents and then they become non-productive and are seen as a waste of time. Stick to the clock and don’t deviate on agenda once you start them.

 

Too often professionals make succession plans out to be large endeavours that take multiple years to create and construct. If this is the case, I go back to my first paragraph that the business was not ready or may never have been ready for this step. Being born a farm child does not entitle you to taking over the farm and being the next heir apparent. And this leads into part two, the destructive forces of succession and transition.